A year ago, Apple (AAPL -1.92%) was in the midst of a blistering nine-month stretch, cementing itself at the top of the market. Meanwhile, Bank of America (BAC -3.53%) stood pat after its less-than-stellar showing in the Fed stress test, while other banks rushed to return capital to shareholders. Apple looked like a stock that couldn't lose, while Bank of America... well, was Bank of America: the stock so many love to hate. But since October, these stocks have switched places. Could the formerly scorned bank now be a better investment than the once-hot tech superstar?
There's no magic metric that can answer this question once and for all. With literally hundreds of data points available for comparison, let's look at a few to see who comes out on top.
Valuation
Based on P/E ratio, Apple wins by a landslide, trading at around 10 times earnings. Bank of America shows its struggles over the past year; its reduced earnings expanded its P/E to almost 50. If we can believe the analysts' and companies' earnings forecasts, the gap between these numbers should narrow going forward, with Apple checking in at 8.6 times earnings and B of A at 9.2.
But price-to-earnings ratios don't tell the whole story, and each balance sheet shows hidden value. Bank of America, the second-largest bank based on total assets, is currently trading at a 46% discount to book value. Apple, on the other hand, has a $137 billion cash hoard that it's reluctant to part with, its year-old dividend notwithstanding. Though I like dividends as much as the next guy, the deep discount of B of A is slightly too enticing at this point, and its annual dividend will surely be more than $0.04 per share before too long.
Management
Bank of America CEO Brian Moynihan wasn't in charge when Bank of America truly descended into madness with its acquisition of Countrywide, but he has done an admirable job extricating the bank from billions in bad loans related to the acquisition. Nevertheless, the bank is still facing billions of dollars in potential liabilities before it is completely out of hot water.
Tim Cook has done a great job as Apple's CEO after taking over for the late Steve Jobs, but his honeymoon period could be coming to an end. Apple hasn't truly released a new product since Jobs' death -- just upgrades -- and the iPad Mini is a device that Jobs probably would have never released. Still, Apple and its products have a devout following, and the company still has little problem selling billions of devices every time it brings something to the market.
Business & risks
Each company is at a different kind of crossroads. At its core, Apple is based on innovation, and it could be just one new (or improved) product away from its lofty heights of last year. As we approach the two-year anniversary of Jobs' death in October, it is hard to say how his ideas may continue to influence the company. The iPad Mini may well have been the first step away from Jobs' stable of products, and there may truly be something new coming. We won't know for sure until it actually appears -- iWatch and iTV chatter notwithstanding.
Bank of America is in the midst of "Project New BAC," trying to clean up its balance sheet and launch a new way of doing business. One surefire way to get going on this new path is to start putting some of its known liabilities behind it so it can focus on some of the unknowns mentioned above. It is currently battling insurer MBIA (MBI 0.48%) about some Countrywide mortgages and has been on the losing end in two recent decisions. It could be time to just settle the suit and shift its focus elsewhere.
Is Bank of America the better buy?
Bank of America appears to have most of its major issues behind it, and it's trading at an extreme discount to book value. In my opinion, this makes it the better buy today. That said, I don't think Apple is a bad stock. It simply has more to prove in the short term. I could be wrong to favor Bank of America, but with first-quarter earnings right around the corner, we'll have a good idea of whether it's heading in the right direction.
